Self-funded retirees are being asked by Reserve Bank governor Dr Philip Lowe to bear a heavy burden for the collective good, with his announcement on Tuesday of the decision to cut the official cash rate to just 0.1 per cent.
Outraged retiree groups are calling for measures, including a cut to deeming rates, to support retirees most affected by the latest interest rate cut.
President of the Association of Independent Retirees Wayne Strandquist said the RBA’s interest rate decision was a “kick in the guts” for retirees and increased the financial pain being felt by fully and partly self-funded retirees.
“Fixed interest investment forms a substantial part of a retiree’s superannuation and private savings, particularly in the latter years of retirement,” said Mr Strandquist.
“The Reserve Bank cash rate reduction will put more downward pressure on term deposit rates with cash held in bank accounts paying almost zero interest.
“The reduction in fixed interest by the RBA continues a trend that has seen term deposit rates fall to historic lows, to a fraction of what they were when many retirees left the workforce.”
Mr Strandquist said when bank account fees were taken into account, many retirees were effectively paying the bank to hold their retirement savings.
“This negative return will further lower the living standards of retirees and require larger drawdowns from their retirement savings until they are forced to rely on the Age Pension,” he said.
The association is calling on the government to reduce the deeming rates for the income test for the Age Pension to reflect the latest dramatic cut to interest rates.
“The 2.25 per cent government deeming rate is over three times the interest rate that can be actually earned today by retirees on a two-year term deposit with the major banks,” Mr Strandquist said.
“To earn returns that exceed the upper deeming rate, retirees are forced to consider riskier investments including a volatile share market.”
YourLifeChoices contacted the Department of Social Services to ask whether a cut to deeming rates is being considered in light of the latest interest rate cuts, but did not receive a reply prior to publication.
Rice Warner executive director Michael Rice told The Australian that interest rate cuts have “smashed” self-funded retirees in recent years.
He explained that eight years ago a three-year term deposit earned 7 per cent, which meant it was possible to earn an additional $14,000 a year from deposits and still receive the full Age Pension. With current interest rates it was only possible to earn an extra $2000.
Mr Rice explained that while fully self-funded retirees with around $800–900,000 in savings with most of those assets in superannuation might be okay, those with around $400,000 or less “are the ones that suffer”.
“What happens in practice is they spend their money quicker and run out of money long before they die,” Mr Rice said.
National Seniors Australia chief advocate Ian Henschke told The Australian that the vast majority of older Australians keep most of their money in the bank and the latest interest rate decision could lead to more retirees living in poverty.
“The problem is older Australians can’t go back into the workforce, so they are totally reliant on income from their savings,” Mr Henschke said.
“We know the pension is not sufficient to live on because one in four pensioners live in poverty.”
How will the Reserve Bank’s interest rate decision affect your retirement? Do you believe deeming rates should be lowered to reflect the latest interest rate cut? Would that improve your financial situation?
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